Poison SIP

I wanted to save tax, for first time in my life my salary was good enough to be taxed. I was working with a business newspaper, but had no clue where to invest the little that I could afford so that it solves the dual purpose of tax-saving and investment. By then, I had not heard of the term financial advisors, but all I knew was people who called themselves LIC agents and used to sell every investment product they could get hand of and which could earn commissions.
I was never sure if they could give you prudent investment advice, however, I was also aware of the fact that they knew more than me. So, when this neighbor of mine approached me with this mutual fund scheme, which would help me both in tax saving as well as generating good return, I was excited -- excited because it would be my first investment.
The name of the fund also promised a lot and induced me into putting money in the scheme. However, I did not have a large amount with me to put it at one go and then for the rest of the three year see my money growing in leaps and bound – then I didn’t think of anything called economic slowdown even touching Indian shores. My advisor-cum-friendly-neighbour suggested me to go for the systematic investment plan (SIP), through which you put a small monthly amount in a mutual fund for three years and claim deduction on it every year for the next three years. I found the SIP model of my liking and gave it a nod.
It’s almost two years since my first investment and now I am aware of a few things about tax savings, mutual funds and insurance. So, I am here to do a post-mortem of my first investment decisions.
To begin with, the choice of the fund house (a very big name not just in mutual fund industry but in so many other sectors), with a retrospective view, was wrong. Big name alone doesn’t guarantee you good return, though you would be relatively more confident that by the end of the three-year tenure, you will get your principal back if not a huge return on it. The scheme turned out to be below average in terms of return, while many other tax-saving schemes from equally big stables, are doing much better. In retrospect, I think a more conservative brand name would have been a better deal for me in this case as is evident from their two-year return.
Today, my investment is worth 98 per cent of my principal amount. While the funds less illustrious rivals have managed to keep it just above 100 per cent. So, I am still in negative zone in less than a year from now my first SIP would be ready for maturity. I would be happy if I managed to take my principal amount back home.
That was the performance part. Now, the strategic mistake that I made. Going for SIP in tax-saving schemes means your investment would be locked up for six year instead of three. The reason is that tax-saving schemes have a lock-in of three years and in systematic investment plan, each of your SIP amount is locked for three years. That means you can withdraw only the first SIP amount after three years. It also means your last SIP could be retrieved only after 6 years since you start investing.
I don’t know how the market would behave in the next four years, but I am sure my money would be at its mercy till then.

where's my money honey

If you had invested in a tax-saving schemes a couple of year ago, there are chances that a large portion your hard earned money might have flowed out of the drain courtesy your inefficient fund managers.
More than 60 per cent of tax-saving schemes available in India for more than two years have been showing negative returns. The average return given by these tax savings mutual funds in the past two years has been -2.25 per cent as on August 10, 2009. The worst performing funds over the two-year period are Fortis Tax Advantage Plan, Principle Tax Savings and ING Tax Savings, each of which has shown a drop of over 28 per cent in the past two years.
So if you had invested Rs 100,000 in 2007 there are chances that you are left with just Rs 72,000 today. If you go by what the fund managers promised you two years back (a minimum of 30 per cent appreciation in three years,that is Rs 130,000), they need to generate Rs 58,000 in the next one year, that is over 80 per cent return in 2009-10.
Over the past one year, the average return of these funds has been –1.05 per cent. Out of the 30 tax savings schemes that have been in existence for over one year, 15 have given negative returns, the worst being JM Tax Gain, which has given a return of –33 per cent in past one year. In the one-year period, Canara Robeco has given the maximum return of over 22 per cent.
Of the 10 fund that gave positive returns in the past two years, the average return has been around 5.3 per cent, which is less than the two-year annualised return of 7 per cent given by fixed deposit schemes of banks.
The best performing funds during the two-year period are Taurus Tax Shield with a return of 15 per cent in past two years, Sundaram BNP Paribas with a return of around 10 per cent and Canara Robeco Equity Tax Saver with 9 per cent return.
Tax-saving mutual fund schemes are diversified equity schemes with a three-year lock-in period compared with five-year lock-in period of bank fixed deposit schemes that offer tax benefits and six-year lock-in of National Savings Certificate (NSC).
Experts says the returns on equity funds depend on market conditions. In the past two year, the Nifty has given a return of 1.18 per cent while the Sensex has given a return of 0.47 per cent. While some funds outperformed the indices, a majority of them underperformed depending on their investment strategies. Fund with exposure to large-cap funds may have done better than those with mid- and small-cap funds.
In the April-June quarter, due to positive market conditions, fund houses have given very high returns, thus making a sort of recovery from the slump that they saw in between January 2008 and March 2009.
The reason for investors’ travails could be overambitious returns target set by fund managers, as the managing director of a large fund house puts it, “Tax schemes of fund houses often invest in mid-cap stocks because of the formers’ medium-term orientation. During the past two years, the return on mid-cap stocks has been either low or negative, leading to negative average return of tax-saving funds.”
In the past two years, the BSE Mid-cap and Small-cap indices have given a return of –9.5 per cent and –12.35 per cent respectively.
So, while you may have saved some money as tax but you may have lost a bigger amount to inefficient fund managers.